Nov 22 (Reuters) - Price action in FX options warned of the increasing risk of EUR/USD volatility and losses, with the euro zone PMI data being a particular flash-point, but the speed and distance of the subsequent EUR/USD drop still caught many off guard.
FX option premiums took another leg higher in a variety of contracts and across all maturity dates after the PMI data. The main focus of these trade flows stays with the need to protect against EUR/USD volatility and more potential losses before, and well after, Donald Trump becomes the next U.S. president in January.
The benchmark 1-month expiry EUR/USD implied volatility, which gauges realised volatility risk and is a key determinant of an option premium, has fully recovered the post U.S. election drop from 9.0 to 6.25 - highs since March 2023. Three-month through 1-year expiry implied volatility continues to build on post election gains to trade its highest levels in over a year.
Risk reversals add more premium to downside over upside strikes, while outright demand for downside strikes continues, too.
Butterfly spreads are another key measure of realised FX volatility and the 10 delta contracts with 1-3-12 month expiries are extending their highs, with the latter trading levels last seen in March 2023.
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(Richard Pace is a Reuters market analyst. The views expressed are his own)
((Richard.Pace@thomsonreuters.com))
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